Thoughts on business school, economics, NC State, and everyday life from an economist at NC State's business school

Monday, July 19, 2010

It really is the worst job market since the 1930s

Two recent blog posts display graphics that eliminate any doubt that this has been the worst employment situation since the Great Depression. Greg Mankiw shows the median duration of unemployment spells, which has typically maxed out at 10 weeks in previous recessions. It now clocks in at 26 weeks, not just higher than previous peaks but 2.5 times higher. This number is generated when a Census Bureau employee asks an unemployed person in the Current Population Survey how long he/she has been out of work. Keep in mind that this underestimates the actual amount of time people will need to become employed (or drop out of the labor force). Historically a rough rule of thumb is that is spells of unemployment that are still in progress last, say 10 weeks, then the average spell once completed will last 20 weeks (on average people will be interviewed at the midpoint of their interval of unemployment). Implication: the average unemployed person will be out of work a year. And not all unemployment spells end in new jobs, some simply give up and leave the labor force.

Some complain that unemployment is too subjective a measure and, in many cases, is not all that different from being out of the labor force. An alternative metric is the employment/population ratio. Former NYU b-school dean Thomas Cooley posts the bad news on his Forbes blog. The ratio has dropped further than in any previous post-World War II recession (seven percentage points versus two to four in earlier recessions). In earlier recessions, the ratio started trending upward after 1 to 1.5 years. We have yet to see this ratio head north, after 2.5 years!

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Steve Allen is Associate Dean for Graduate Programs and Research in the College of Management at NC State University. He has appointments in the Department of Economics as well as the Department of Management, Innovation, and Entrepreneurship. Steve also is a Research Associate of the National Bureau of Economic Research, a non-profit research organization located in Cambridge, Mass.